1. Chapter 12 MRP and ERP McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 12: Learning Objectives
You should be able to:
Describe the conditions under which MRP is most appropriate
Describe the inputs, outputs, and nature of MRP processing
Explain how requirements in a MPS are translated into material requirements for lower-level items
Discuss the benefits and requirements of MRP
Explain how an MRP system is useful in capacity requirements planning
Outline the potential benefits and some of the difficulties users have encountered with MRP
Describe MRPII and its benefits
Describe ERP, what it provides, and its hidden costs
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3. Dependent Demand Dependent demand
Demand for items that are subassemblies or component parts to be used in the production of finished goods.
Dependent demand tends to be sporadic or “lumpy”
Large quantities are used at specific points in time with little or no usage at other times
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4. Dependent vs Independent Demand
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5. Material requirements planning (MRP):
A computer-based information system that translates master schedule requirements for end items into time- phased requirements for subassemblies, components, and raw materials.
The MRP is designed to answer three questions:
What is needed?
How much is needed?
When is it needed?
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6. Overview of MRP
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7. MRP Inputs: Master Schedule
One of three primary inputs in MRP; states which end items are to be produced, when these are needed, and in what quantities.
Managers like to plan far enough into the future so they have reasonable estimates of upcoming demands
The master schedule should cover a period that is at least equivalent to the cumulative lead time
Cumulative lead time
The sum of the lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final assembly.
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8. Cumulative Lead Time
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9. MRP Inputs: Bill of Materials
Bill of Materials (BOM)
A listing of all of the assemblies, subassemblies, parts, and raw materials needed to produce one unit of a product
Product structure tree
A visual depiction of the requirements in a bill of materials, where all components are listed by levels
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10. Assembly Diagram and Product Structure Tree
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11. Low-Level Coding Low-level coding
Restructuring the bill of material so that multiple occurrences of a component all coincide with the lowest level at which the component occurs
Level 3
Level 2
Level 1
Level 0 X
B(2)
D(3)
E(4) E C
E(2)
F(2)
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12. MRP Inputs: Inventory Records
Includes information on the status of each item by time period, called time buckets
Information about
Gross requirements
Scheduled receipts
Expected amount on hand
Other details for each item such as
Supplier
Lead time
Lot size policy
Changes due to stock receipts and withdrawals
Canceled orders and similar events
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13. Assembly Time Chart
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14. MRP Processing
MRP processing takes the end item requirements specified by the master schedule and “explodes” them into time-phased requirements for assemblies, parts, and raw materials offset by lead times
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15. MRP Record Gross requirements Scheduled receipts Projected Available
Week Number 1 2 3 4 5 6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
Gross requirements
Total expected demand
Scheduled receipts
Open orders scheduled to arrive
Projected Available
Expected inventory on hand at the beginning of each time period
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16. MRP Record Net requirements Planned-order receipts
Week Number 1 2 3 4 5 6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
Net requirements
Actual amount needed in each time period
Planned-order receipts
Quantity expected to received at the beginning of the period offset by lead time
Planned-order releases
Planned amount to order in each time period
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17. MRP: Development
The MRP is based on the product structure tree diagram
Requirements are determined level by level, beginning with the end item and working down the tree
The timing and quantity of each “parent” becomes the basis for determining the timing and quantity of the “children” items directly below it.
The “children” items then become the “parent” items for the next level, and so on
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18. Shutter Wood sections (4) Frames (2) Example MRP 12-18
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19. Example MRP
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20. Example MRP
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21. Using the MRP
Pegging
The process of identifying the parent items that have generated a given set of material requirements for an item
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22. Updating the System An MRP is not a static document As time passes
Some orders get completed
Other orders are nearing completion
New orders will have been entered
Existing orders will have been altered
Quantity changes
Delays
Missed deliveries
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23. MRP Outputs: Primary Primary Outputs Planned orders Order releases
A schedule indicating the amount and timing of future orders
Order releases
Authorizing the execution of planned orders
Changes
Revisions of the dates or quantities, or the cancellation of orders
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24. MRP Outputs: Secondary
Secondary Outputs
Performance-control reports
Evaluation of system operation, including deviations from plans and cost information
e.g., missed deliveries and stockouts
Planning reports
Data useful for assessing future material requirements
e.g., purchase commitments
Exception reports
Data on any major discrepancies encountered
E.g., late and overdue orders, excessive scrap rates, requirements for nonexistent parts
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25. Other MRP Considerations: Lot Sizing Rules
Lot-for-Lot (L4L) ordering
The order or run size is set equal to the demand for that period
Minimizes investment in inventory
It results in variable order quantities
A new setup is required for each run
Economic Order Quantity (EOQ)
Can lead to minimum costs if usage of item is fairly uniform
This may be the case for some lower-level items that are common to different ‘parents’
Less appropriate for ‘lumpy demand’ items because inventory remnants often result
Fixed Period Ordering
Provides coverage for some predetermined number of periods
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26. Other MRP Considerations: Safety Stock
Theoretically, MRP systems should not require safety stock
Variability may necessitate the strategic use of safety stock
A bottleneck process or one with varying scrap rates may cause shortages in downstream operations
Shortages may occur if orders are late or fabrication or assembly times are longer than expected
When lead times are variable, the concept of safety time is often used
Safety time
Scheduling orders for arrival or completions sufficiently ahead of their need that the probability of shortage is eliminated or significantly reduced
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27. MRP in Services Food catering service Hotel renovation
End item  catered food
Dependent demand  ingredients for each recipe, i.e., bill of materials
Hotel renovation
Activities and materials “exploded” into component parts for cost estimation and scheduling
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28. MRP Benefits Enables managers to easily Additional benefits
determine the quantities of each component for a given order size
To know when to release orders for each component
To be alerted when items need attention
Additional benefits
Low levels of in-process inventories
The ability to track material requirements
The ability to evaluate capacity requirements
A means of allocating production time
The ability to easily determine inventory usage via backflushing
Exploding an end item’s BOM to determine the quantities of the components that were used to make the item
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29. MRP Requirements To implement an effective MRP system requires:
A computer and the necessary software to handle computations and maintain records
Accurate and up-to-date
Master schedules
Bills of materials
Inventory records
Integrity of data files
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30. MRP II Manufacturing resources planning (MRP II)
Expanded approach to production resource planning, involving other areas of the firm in the planning process and enabling capacity requirements planning
Most MRP II systems have the capability of performing simulation to answer a variety of “what if” questions so they can gain a better appreciation of available options and their consequences
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31. MRP II: Overview
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32. Closed Loop MRP
When MRP II systems began to include feedback loops, they were referred to as closed loop MRP
Closed Loop MRP
Systems evaluate a proposed material plan relative to available capacity
If a proposed plan is not feasible, it must be revised
This evaluation is referred to as capacity requirements planning
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33. Capacity Requirements Planning
Capacity requirements planning (CRP)
The process of determining short-range capacity requirements.
Inputs to capacity requirement planning
Planned-order releases for the MRP
Current shop loading
Routing information
Job time
Key outputs
Load reports for each work center
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34. System Stability Stability in short-term plans is very important
Without stability, changes in order quantity and/or timing can render material requirements plans virtually useless
System nervousness refers to how a system might react to changes
Sometimes the reaction can be greater than the original change
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35. Time Fences Time fences
Series of time intervals during which order changes are allowed or restricted
The nearest fence is most restrictive
The farthest fence is least restrictive
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36. Using MRP to Assist in CRP
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37. Load Reports Load reports
Department or work center reports that compare known and expected future capacity requirements with projected capacity availability.
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38. Enterprise Resource Planning
Enterprise resource planning (ERP)
ERP was the next step in an evolution that began with MRP and evolved into MRPII
ERP, like MRP II, typically has an MRP core
Represents an expanded effort to integrate standardized that will permit information sharing among different areas of an organization in order to manage the system more effectively
ERP systems are composed of a collection of integrated modules
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39. Overview of ERP Software Modules
Brief Description
Accounting/Finance
A central component of most ERP systems. It provides a range of financial reports, including general ledger, accounts payable, accounts receivable, payroll, income statements, ad balance sheets
Marketing
Supports lead generation, target marketing, direct mail, and sales
Human Resources
Maintains a complete data base of employee information such as date of hire, salary, contact information, performance evaluations, and other pertinent information
Purchasing
Facilitates vendor selection, price negotiation, making purchasing decisions, and bill payment
Production Planning
Integrates information on forecasts, orders, production capacity, on-hand inventory quantities, bills of material, work in process, schedules, and production lead times
Inventory Management
Identifies inventory requirements, inventory availability, replenishment rules, and inventory tracking
Distribution
Contains information on third-party shippers, shipping and delivery schedules, delivery tracking
Sales
Information on orders, invoices, order tracking, and shipping
Supply Chain Management
Facilitates supplier and customer management, supply chain visibility, and event management
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40. Operations Strategy ERP strategic implications
High initial cost
High cost to maintain
Need for future upgrades
Intensive training required
ERP as a strategic planning tool
Can improve supply chain management
Stronger links between their customers and their supplier
Makes the organization more capable of satisfying changing customer requirements
Offers opportunities for continuous improvement
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